Mike Bloomberg Is Woefully Mistaken

“We are spending money we don’t have,” Mr. Bloomberg explained. “It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money. … Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.”

Nanny Bloomberg is correct in many respects, but ultimately woefully mistaken.  People will not lend us an infinite amount of money.  They may lend us alot of money, but it is, undeniably, finite.  In fact the Chinese have mostly stopped lending us money.  The people who mostly lending us money are...ourselves.

What Nannyberg seems to not want to discuss is that the terms upon which people lend us money are renegotiated almost every day. Those terms are going to change in the near future and the terms are going to get increasingly onerous.  At some point, an infinite amount of money (or even just alot) is meaningless, there are terms under which one shouldn't and won't borrow.  The vast sums of nearly cost free money that we now spend with reckless abandon is an historical anomaly and it will shortly disappear.  Lenders will start to demand a rate commensurate with a) our debauched creditworthiness, and/or b) the prospect of ultimately receiving devalued dollars in return as repayment.  When this process gets well under way, the costs of our fiscal incontinence will go way up and the pain will not be from cutting spending, the real pain will be from keeping spending.  You see, the miracle of compound interest works in reverse too.  Debts compound rather quickly at increasing interest rates, and if they rise fast enough, it is nearly impossible to avoid a debt death spiral.

Finally, it is precisely this type of statement by a prominent politician that gets lenders gittery about whether we have any fiscal sense.  The world is wondering if we'll ever get our house in order and a guy who many talk about as a presidential contender states that he think we have an infinite source of funding...?  Yeesh.